The recovery has begun

The President and CEO of Hufvudstaden sums up the year and looks forward.

It is with humility and great confidence about the future that I take over as President after Ivo Stopner, who chose to retire at the end of 2021. I have worked at Hufvudstaden for 15 years in roles that included Head of Property Development and most recently as Head of the Stockholm Business Area and Vice President.

I look forward to continuing to develop Hufvudstaden together with our employees to meet the changes in the society and further strengthen our unique position in the market. The aim is to create long-term added value for the city, our customers and shareholders.

The world has been affected by the coronavirus pandemic for more than two years. Despite this, the global economy made a strong recovery in 2021, largely thanks to the increased vaccination rate. In Sweden, GDP growth was about 5 per cent, mainly driven by industry and the service sector. Inflation rose, largely due to rising energy prices, though the repo rate remained unchanged at zero per cent. In response to the higher inflationary pressure, several central banks signalled a raise of the interest rates from current low levels. Hufvudstaden has a low loan-to-value ratio and index-linked leases, which means the company is well positioned should inflation remain at higher levels.

Sweden’s domestic politics were characterised by management of the pandemic and the rise in gang crime as well as government formations and elections to appoint a new Prime Minister. Internationally, geopolitical tension grew in both Europe and Asia.

Record-strong property market

The Swedish property market was very strong during the year. Access to capital remained favourable and there was substantial interest in acquiring properties. Transactions were completed for approximately SEK 370 billion, which is the highest turnover ever. Offices, logistics, residential and public buildings were the properties that changed ownership most frequently. A few property transactions in central Stockholm and Gothenburg completed at the end of the year demonstrated decreasing yield requirements.

At year-end, Hufvudstaden's property holdings were valued at SEK 48.8 billion (45.6), up by approximately 7 per cent. The increase in value of SEK 3.2 billion is due the effect of lower
yield requirements, higher office rents and investments. NAV at the end of the year was SEK 188 per share (173) and the share price was SEK 135.20 per share.

Development of marketplaces

Hufvudstaden works actively to develop its property holdings to create attractive spaces for people and companies. Current and planned development projects in Hufvudstaden’s properties amount to approximately SEK 3 billion at the present time.

The foundations have been completed and rebuilding has commenced of the new, unique Vildmannen 7 property in Bibliotekstan that was previously destroyed by fire. A lease agreement has been signed for about 2,200 square metres of office space so far and there is substantial interest in the remaining space. The building will be accessed in stages during 2023. The completion of Vildmannen 7 will further strengthen Bibliotekstan.

The women’s floors at the NK department stores in Stockholm and Gothenburg have been developed to meet changed needs in the retail sector. A more efficient floor plan has been
created with smaller departments and improved customer flows to attract new strong brands.

Preparatory work has been taking place in Gothenburg ahead of the start of the major development project Johanna in the Inom Vallgraven 12 block. We have previously obtained a new local plan that allows for approximately 15,000 square metres of additional gross area, and building permission for the entire project was obtained at the end of the year. Production will commence in 2022 and when it is completed, the Johanna project will contribute to strengthening the Fredstan area. 

Increased activity in the office market

Activity in the office rental market gradually increased during the year in both Stockholm and Gothenburg. The demand for modern, flexible office premises in prime locations remained good, with a slight improvement in rent levels. Top rents in Stockholm were approximately SEK 9,000 to 9,500 per square metre and year. Equivalent levels in Gothenburg were about SEK 4,000 to 4,500 per square metre. The leasing processes took slightly longer, which led to a backlog effect with rising vacancies. Remote working has demonstrated the important role offices have as a meeting place to build corporate culture, contribute to creative processes and do business. Offices in central locations with good communications and proximity to service, stores, restaurants and culture are expected to benefit from changed working methods.

Increasingly, office tenants are seeking leases with a high level of flexibility. To meet this, Hufvudstaden has broadened its offer with Cecil Coworking. Members are offered a unique environment with a high degree of flexibility as regards use of the premises, the term of the lease and level of service. There has been substantial interest in Cecil and the facility was almost fully let at the end of 2021. Hufvudstaden also offers the turnkey REDO concept with flexible contract terms.

The year’s renegotiations of office leases resulted in a rent increase of around 17 per cent.

Recovery for an evolving retail sector

The retail sector in central areas of Stockholm and Gothenburg was affected by the coronavirus pandemic for a large part of 2021. Continuing recommendations to work from home as well as restrictions on physical distancing and on opening hours have reduced the flow of people and sales for stores and restaurants in city centres. The recommendations and restrictions were eased as the vaccination rate rose. People returned to our areas and sales recovered swiftly for both stores and restaurants. The market for retail premises in central areas also improved during the autumn. Interest in establishing operations in our marketplaces increased and several new leases were signed. At the end of the year, the spread of infection again grew, which had a negative effect on the retail sector.

The pandemic has hastened change in consumer behaviours and accelerated the growth of e-commerce. To meet the change in the retail sector, greater demands are being made to develop both physical and digital marketplaces.

In the NK department stores, the development of NK’s e-commerce is a top priority, with a focus on a wider product range. The subsidiary NK Retail has operated about 25 per cent of NK departments since early 2021. The close cooperation between AB NK and NK Retail has increased our overall competence in retail and promotes the development of both the department stores and NK’s e-commerce.

Hufvudstaden’s centrally located properties have an excellent potential to continue to offer consumers attractive meeting points and marketplaces with unique purchasing experiences.

Sustainable business

A major focus in world politics has been global warming and how to reduce the climate footprint of people. Hufvudstaden has been working actively for a long time to attain its ambitious goals concerning economic, social and environmental sustainability. Using the company’s sustainability plan, we have developed measures and worked on ways to further reduce climate impact. The target is to achieve climate-neutral property management by 2025. Since 2019, the climate-impacting emissions from property management have decreased by 39 per cent. Moreover, energy use is to be reduced by at least 16 per cent between 2019 and 2025. To date, energy use has decreased by 11 per cent.

During the autumn, Hufvudstaden launched a Green framework to finance climate-smart solutions in projects and properties certified under green building programmes. The first green bond was issued for SEK 1 billion. More than 70 per cent of the company’s properties are environmentally certified.

Hufvudstaden was ranked first in the Large Company category in this year’s Customer Satisfaction Index survey of office tenants, with the highest ever score since the survey began in the 1990s. This is clear proof that our systematic quality management is working effectively and that our customers view us as a solid partner even in challenging times. A satisfied customer is essential for a long-term business relationship, which is positive for both profitability and the environment.

It is also gratifying that once again this year we were ranked first among property companies in Europe in the international Global Real Estate Sustainability Benchmark (GRESB) in the office and retail category. This confirms that we have adopted the right approach from a broad perspective on sustainability.

Improved earnings

Hufvudstaden reported a recovery in profit from operating activities. Gross profit from property management increased by 2 per cent, totalling SEK 1,221 million (1,194). This is primarily a result of higher rent revenue from both offices and retail space. Elimination of intra-Group rent revenue amounted to SEK 153 million (44).

The profit after tax for the year was SEK 2,955 million (-1,462). The strong improvement is attributable to positive unrealised changes in value in the property holdings driven by decreasing yield requirements and higher office rents.

The future

The foundation of our operations is to optimise profitability in the day-to-day management of commercial properties in the most central and attractive locations in Stockholm and Gothenburg. If we are to succeed, our offering must be relevant and attractive over time. The business concept stands firm but the operations are continually evolving based on new needs and behaviours. Work in business and property development creates new customer offerings and contributes to stronger marketplaces, which result in higher property values.

The Johanna project will begin in 2022, one of Hufvudstaden’s largest development projects ever, which in the long term and together with other projects will add new cash flows. We will also focus on developing our new operations: NK e-commerce, NK Retail and Cecil Coworking.

Finally, I would like to thank all of our employees for such enormous commitment and fantastic work during a challenging year. I would also like to address a special thank you to Ivo Stopner for his over 30 years of dedicated work for Hufvudstaden, of which 22 years as president. Ivo has done a great job and developed the company into the well-managed operation it is today. I would also like to thank you for the trust given to me to continue to develop this outstanding company and to help create the city of tomorrow.

Stockholm, February 2022

Anders Nygren